Allocation of Decision-Making Authority

Abstract

We present a simple model to analyze the allocation of decision-making authority and use the model to characterize the conditions under which a superior will delegate the decision to her subordinate. The model includes two managers, each of whom has private information regarding the outcome of a decision. Because the preferences of the two managers differ, neither can communicate her information fully to the other. We show that the probability of delegation increases with the importance of the subordinate's information and decreases with the importance of the superior's information. We also show that, even if the agent is biased toward larger investments, under certain conditions, the average investment will be smaller when the decision is delegated. These results help explain some findings in the empirical literature. Finally, we show the somewhat counterintuitive result that, in some circumstances, increases in agency problems result in increased willingness of the superior to delegate the decision. A number of empirical implications are developed.

Keywords: Delegation, Authority, Private Information, Communication

JEL Classification: D21, D82, G31